With more than 2.5 million small and medium sized enterprises (SMEs) in South Africa, you’d imagine that getting funding for these businesses would be simple.
However, accessing funding remains the largest challenge faced by South Africa’s small businesses. In fact, there is a R86 billion – R346 billion funding gap according to a study sponsored by the SA SME fund.
A problem this size draws out innovators who see opportunity. South Africa now has a growing alternative lending sector that is focused on providing funding for this market by developing new lending models, a specific focus on certain sectors, using data in new ways and finding different ways of assessing risk which are in some parts more appropriate for this market than the approach taken by banks.
Helping financial players succeed
Dominique Collett, head of AlphaCode, which incubates, accelerates and invests in early stage financial service ventures, explains: “We’re interested in helping fintechs that are doing things that the banks aren’t doing well. SME lending is a massive gap and a global problem. As SMEs are the lifeblood of any economy, it’s important that these new financing players succeed and meet the needs of this market.”
Related: Government Funding And Grants For Small Businesses
Johan Bosini, partner at Quona Capital which invests in tech businesses providing financial services for under-served consumers and SMEs in emerging markets explains, “South African banks have historically focused on consumers rather than small businesses as businesses are less homogenous and therefore more complicated to service.”
“Our banks’ credit products are usually inflexible in their loan requirements and take a long time to process more complicated credit applications. Banks can at times provide better pricing than alternative lenders, but small businesses often need funding immediately as opportunities present themselves and they are willing to pay a premium for speed and flexibility.”
Bosini believes that South Africa is going to see a lot of activity in this sector. Startups, banks and insurance companies will better focus on this market due to its strategic importance – this is the sector from where more job creation will come.
“There needs to be healthy competition and multiple players to grow the entire ecosystem. We will see more collaboration to support small businesses. So much more needs to be done,” he concludes.
Alternative financing options
Finfind data shows that startup capital, buying equipment, expanding businesses and working capital are the largest funding requests in SA. This is a list of the different types of alternative financing available to South African SMEs.
Related: 4 Common Methods You Can Use To Fund Your Start-up
| Alternative finance partner | About the partner | Who they serve | Amount |
| Compare business lenders | |||
| Fincheck
| Fincheck partners with South African banks, lenders and insurers offering a live and independent means of comparing and applying for finance across 30 lenders. | Business owners seeking finance in South Africa.
| R20 000 – R72 million |
| Unsecured lenders | |||
| Lulalend | Delivers business funding using proprietary scoring technology, which offers an instant funding decision on applications. | South African businesses across all industries trading for more than one year with annual revenue of R500 000 plus. | Delivers business funding using proprietary scoring technology, which offers an instant funding decision on applications. |
| Fundrr | Developed an automated credit model that analyses close to 100 data points to provide a complete picture of growth possibilities. This produces a Fundrr score. Apply in minutes online. | At least a 12-month track record, with a minimum of R1 million turnover or asset value. Any industry. | R20 000 – R500 000. The repayment terms are individually tailored. Repayments either daily, weekly, bi-monthly or monthly over a 3 – 12-month repayment period. Rates of interest vary. Offers an early repayment incentive. |
| Merchant cash advance | |||
| Merchant Capital www.merchantcapital.co.za
| Pioneer in the South African merchant cash advance industry which allows the repayment of the advance to be repaid through technology embedded in point of sale machines. Offers merchant cash advances for retail businesses with flexible repayment terms. | Retail business owner with an average of over R30 000 in credit and debit card sales and has been in operation more than one year. | Qualification of up to 100% of a business’ average monthly credit and debit card turnover. Funding in 24 hours. Holds back an agreed % of all future card sales, until advance is fully paid off. No limit to the amount that can be advanced – all turnover dependent. |
| iKhoka
| Offers card machines that accept debit and credit cards. After three months of trading, offers you a custom cash advance offer. | Check your offer in the iKhokha app and decide how much you need. The more you process through iKhokha, the bigger the amount you qualify for.
| Depends on turnover of your business over three months. Money paid to you within 24 hours. You will pay the advance as a percentage of your future card sales with a flat cash advance fee. No compound interest. |
| Inventory finance | |||
| Zande Africa www.zande.co.za
| Provides trade and merchant finance to spaza shops. Zande provides credit so that spazas are able to buy stock. The spaza owners build a credit score by trading in cash with Zande over 3 to 6 months. | You are looking to procure stock for your spaza shop. Spaza credit is a form of inventory finance that will assist you. N
| Lines of credit depend on the turnover of the spaza. Zande advancec physical stock to the spaza payable in 7 – 14 working days.
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| Invoice, purchase order, contract and working capital finance | |||
| Bright On Capital
| Bright On Capital is an online peer-to-peer lender that provides affordable working capital funding to emerging small supplier businesses with sustainable growth prospects.
| Small businesses that have been trading for at least 12 months, who are supplying one or more corporates or credit-worthy public entities, and are expecting to generate at least R1 million in annual revenues.
| Small businesses can access revolving working capital facilities of up to R1 million to execute on procurement opportunities sourced from these qualifying large entities.
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| ProfitShare Partners | ProfitShare Partners provides disruptive short-term capital solutions and transactional support to SMEs with valid contracts or purchase orders from reputable large organisations. | SMEs with no track record, financial history or security with low performance, short-term contracts (up to 365 days) or purchase orders with reputable large organisations. | Minimum of R250k up to R5m per transaction – does not charge interest, profit shares on the transaction. Response to applications within 24-48 hours, term sheet within 48 hours and successful deals pay out within 7 days. |
Related: Attention Black Entrepreneurs: Start-Up Funding From Government Grants & Funds